I think I figured this out...
Use the "insert image" button to pull pictures from your photo albums. I did this with a picture the other day. I'm no expert, so hopefully someone else will correct this if I'm wrong.

I went on photobucket and took my desired picture for my signature, and I resized it to the medium setting and it came out to what you see in it now. I don't think it's that big, but I do think it is bigger than the 250 pixel limit. :money: